{"id":199481,"date":"2020-07-14T11:01:35","date_gmt":"2020-07-14T18:01:35","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=199481"},"modified":"2023-09-14T11:33:32","modified_gmt":"2023-09-14T18:33:32","slug":"what-is-debt-vs-equity-financing-pros-cons","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/what-is-debt-vs-equity-financing-pros-cons\/","title":{"rendered":"What is Debt vs Equity Financing? Learn about the Pros and Cons of Each"},"content":{"rendered":"<p dir=\"ltr\">As a business grows, every business owner faces the debt vs. equity financing decision for funds to support growth. An owner has two choices: take on debt or raise more equity.<\/p>\n<p dir=\"ltr\">Debt means <a href=\"https:\/\/www.nationalfunding.com\/small-business-loans\/\" target=\"_blank\" rel=\"noopener noreferrer\">applying for a loan<\/a> from a lender. It can be <a href=\"https:\/\/www.nationalfunding.com\/solutions\/short-term-business-loans\/\">short-term<\/a>, long-term, or revolving. Debt always involves some form of repayment with interest that must be made whether the company is making a profit or not.<\/p>\n<p dir=\"ltr\">Equity financing involves the owner giving up a share of the business. Unlike debt, equity financing doesn&#8217;t require repayment. Investors hope to see a return on their money by receiving dividends or an increase in the share price of their investment.<\/p>\n<p dir=\"ltr\">Understanding debt vs. equity financing&#8217;s pros and cons can help you decide which way to go.<\/p>\n<h2>Pros and Cons of Debt Financing<\/h2>\n<p dir=\"ltr\"><strong>Pros:<\/strong><\/p>\n<ul>\n<li>Doesn&#8217;t dilute the owner&#8217;s portion of ownership<\/li>\n<li>Lender doesn&#8217;t have a claim on future profits<\/li>\n<li>Debt obligations are predictable and can be planned<\/li>\n<li>Interest is tax deductible<\/li>\n<li>Debt financing offers flexible alternatives for collateral and repayment options<\/li>\n<\/ul>\n<p dir=\"ltr\"><strong>Cons:<\/strong><\/p>\n<ul>\n<li>Debt must be repaid<\/li>\n<li>Can be difficult to qualify for, depending on financial status and credit score<\/li>\n<li>Some debt instruments restrict businesses from pursuing alternative financing options<\/li>\n<li>Higher <a href=\"\/blog\/basic-accounting-small-business\/\" target=\"_blank\" rel=\"noopener noreferrer\">debt-equity ratios<\/a> increase the financial risk of the company<\/li>\n<li>Owners may be required to personally guarantee the debt<\/li>\n<li>Assets could be seized in case of default<\/li>\n<\/ul>\n<p><img decoding=\"async\" title=\"florist considers debt vs equity financing\" src=\"https:\/\/www.nationalfunding.com\/blog\/wp-content\/uploads\/2020\/07\/femaleownerwithdigitalta_791322.jpg\" alt=\"Florist with tablet considers debt vs equity financing\" \/><\/p>\n<h2>Pros and Cons of Equity Financing<\/h2>\n<p dir=\"ltr\"><strong>Pros:<\/strong><\/p>\n<ul>\n<li>No obligation to pay dividends on equity<\/li>\n<li>Possible industry experience and connections from right investors<\/li>\n<li>Investors&#8217; money doesn&#8217;t have to be returned if business fails<\/li>\n<li>Improves financial health of business by reducing leverage<\/li>\n<\/ul>\n<p dir=\"ltr\"><strong>Cons:<\/strong><\/p>\n<ul>\n<li>Having to give up a portion of ownership<\/li>\n<li>Equity costs more than debt because investors risk more<\/li>\n<li>Attracting investors can be harder than getting a loan<\/li>\n<\/ul>\n<p>Raising money for your business and finding the right <a href=\"https:\/\/www.nationalfunding.com\/loans-and-financing\/\">type of financing<\/a> can be time consuming and stressful. To keep cash on hand while pursuing options, owners may also want to consider a <a href=\"https:\/\/www.nationalfunding.com\/small-business-loans\/\" target=\"_blank\" rel=\"noopener noreferrer\">small business loan<\/a> in the interim.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Learn the pros and cons of debt vs equity financing to find the best balance for your company.<\/p>\n","protected":false},"author":26,"featured_media":199480,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[88,98,89,182,97,183,62,94,92],"class_list":["post-199481","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-loans-lending","tag-accounting-for-small-business","tag-accounting-tools-for-small-business","tag-budgeting-for-small-business","tag-debt-financing","tag-equipment-financing-and-leasing","tag-equity-financing","tag-featured-post","tag-how-to-get-a-loan-with-bad-credit","tag-types-of-small-business-loans"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is Debt vs Equity Financing? 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